The Operations Roomhttps://operationsroom.wordpress.com
Fri, 11 May 2018 10:41:28 +0000enhourly1http://wordpress.com/https://secure.gravatar.com/blavatar/d397b6ead241efd918a19cb08bccc770?s=96&d=https%3A%2F%2Fs0.wp.com%2Fi%2Fbuttonw-com.pngThe Operations Roomhttps://operationsroom.wordpress.com
UPS and using contracts to share the risk of building new capacityhttps://operationsroom.wordpress.com/2017/05/09/ups-and-using-contracts-to-share-the-risk-of-building-new-capacity/
https://operationsroom.wordpress.com/2017/05/09/ups-and-using-contracts-to-share-the-risk-of-building-new-capacity/#commentsTue, 09 May 2017 10:27:53 +0000http://operationsroom.wordpress.com/?p=5750Imagine you are service provider and you line up a bunch of extra capacity because your customers tell you that they are expecting they are really going to need you. What should you do when your customers turn out not to have that much business for you?

If you are UPS, you don’t have to imagine. This is a problem they face at the holidays. Retailers want to make sure that there will be space for their shipments on the truck, so they have an incentive to talk up their potential. Of course, no one can tell the future so sometimes their big talk will prove to be just hot air. UPS apparently is thinking of making the initial forecasts from retailer a little more binding (UPS Tries a New Twist on Surge Pricing, May 1, Wall Street Journal).

With the retail world in upheaval, UPS is asking retailers to help pay when the extra space and workers aren’t put to use—or even when the boxes don’t match the sizes that retailers promised earlier in the year.

“If there are variations to the plan, let’s see what we can do, but we should be compensated accordingly,” said UPS Chief Executive David Abney in an interview. He said the charge isn’t meant to be punitive but one element of a broader negotiation with retailers over pricing during peak times.

UPS is apparently also thinking of imposing charges at times beyond the holiday — say for flowers at Valentine’s or when a new product release causes volumes to spike.

I find this story really interesting — if only because it relates to a research stream I use to work in. One can model this problem as contracting in a newsvendor setting. UPS faces uncertain demand and needs to commit to a capacity before learning exactly what it is. And it essentially has one shot to get the number right. Yeah, the company may be able to scrounge up a few more college kids to shuffle packages or to have folks work overtime but all that is expensive. There is really just one chance to line up affordable capacity.

A newsvendor is a pretty straightforward problem but this one has a wrinkle. UPS has a forecast of demand and it may be able to refine that by working with the retailers. But the retailers will always be better informed about just what their needs are. UPS then needs a way to get retailers to credibly reveal their information.

Penalties are one way of doing this. UPS could offer a menu of contracts in which retailers must provide a forecast and choose a price-penalty pair. A low price per package would be paired with a high penalty while a high price per package would have little or no penalty. Mathematically, this would be very similar to UPS selling options on its capacity. If you pay a lot for the option of upfront, it costs little to execute the option and ship. If you buy an option with a low upfront price, execution becomes more expensive. Who takes which contract? If you are confident in your forecast, you opt for the higher penalty (or higher upfront option cost). You’re on the hook if things go poorly but if you are you have the right forecast, this would be the cheapest way of getting your demand served. Those who are just flat-out guessing, they pay a high price for service when they use it but avoid the downside if they don’t. UPS then goes into planning with better information. It not only has forecasts, it has further knowledge about which demand streams should be less variable.

Competition adds another twist. Consider a retailer that deals with both UPS and FedEx. Which shipper should they use for a particular package? Assuming that FedEx doesn’t impose penalties (according to the WSJ article, they are not planning on doing that right now), they should send it by UPS if they haven’t exhausted their commitments. They essentially have prepaid for the service, so they might as well use. On the flip side, UPS would have an incentive to favor firms who are paying high execution costs. If only one more box fits on the truck, it should be the one that is paying a lot.

]]>https://operationsroom.wordpress.com/2017/05/09/ups-and-using-contracts-to-share-the-risk-of-building-new-capacity/feed/1mlarivDevelopments in e-commerce fulfillmenthttps://operationsroom.wordpress.com/2017/04/17/developments-in-e-commerce-fulfillment/
https://operationsroom.wordpress.com/2017/04/17/developments-in-e-commerce-fulfillment/#respondMon, 17 Apr 2017 10:22:14 +0000http://operationsroom.wordpress.com/?p=5746There have been a handful of interesting article over the last week or two about online fulfillment centers. The first is from Bloomberg (Amazon’s Robot War Is Spreading, Apr 5) and discusses how many firms have followed Amazon’s lead and have invested in robots to help run their fulfillment centers. (Recall that Amazon bought Kiva, which we have discussed before.)

One interesting point made in the article is that the automation may not be quite what you think. For example, these robots are not reaching and grabbing items from the shelves (form something like that, see here). Rather, they are working with human pickers who load them up and then let the robot carry items from storage shelves to the packing area. That is, the robots takeover time-consuming schlepping so that humans can focus on identifying the right item on the shelves. Check out this video.

But why is automation all the rage? Costs, of course. As this graph shows, the number of people working in warehousing has been growing pretty quickly over the last decade. Augmenting/supplanting humans with robots reduces the need to hire.

Starting pay for warehouse workers rose 6% over the past year to $12.15 an hour in February, according to an analysis by ProLogistix, a logistics staffing firm. Hourly earnings rose 2.8% across all professions over the same period, according to the Labor Department’s Bureau of Labor Statistics. …

Booming sales mean e-commerce operations have to ship more items faster, and pay increases are imposing new costs. E-commerce fulfillment centers require two to three times as many workers as traditional warehouses, says CBRE Group Inc., a real-estate brokerage. It estimates a $1-an-hour wage increase can raise labor costs by more than $2 million a year at “big box” warehouses employing as many as 1,000 workers.

Finally, investing in robots and building fulfillment with a thousand workers is not something readily available to small retailers. How can a smaller firm compete with the likes of Amazon? That’s the focus of another Wall Street Journal article (Amazon’s Free Shipping Pushes Small Retailers, Delivery Firms to Compete, Apr 8) that discusses service that FedEx and other firms are offering to support smaller retailers.

]]>https://operationsroom.wordpress.com/2017/04/17/developments-in-e-commerce-fulfillment/feed/0mlarivThe benefits of supply chain speedhttps://operationsroom.wordpress.com/2017/04/11/the-benefits-of-supply-chain-speed/
https://operationsroom.wordpress.com/2017/04/11/the-benefits-of-supply-chain-speed/#commentsTue, 11 Apr 2017 10:17:45 +0000http://operationsroom.wordpress.com/?p=5742Here is an interesting graph. It comes from Goldman Sachs by way of Quartz (A new generation of even faster fashion is leaving H&M and Zara in the dust, Apr 6).

It is showing that how sales growth relates to lead time. And while I am obliged to say that correlation is not causation, it seems pretty clear that it is good to be fast; firms with shorter lead times have distinctly higher sales growth.

The focus of the Quartz article is on Boohoo and Asos, two British web-based apparel retailers that target young shoppers. As seen in the chart, their recent performance has been smoking everyone — even Inditex, the parent of Zara. An obvious consideration here is that both Boohoo and Asos are younger, smaller firms so it is easier for them to generate rapid growth than older, larger firms. It also seems that at least Asos has done some things recently to juice its sales that are independent of its operational expertise. For example, the Financial Times reports that they took advantage of a week British pound following the Brexit vote to cut price in international markets (Asos cuts its cloth for growth but leaves less margin for error, Apr 4).

But it is still an interesting question of how a web-based retailer can benefit from its distribution structure to execute fast fashion faster.

Looking at Boohoo is possibly instructive here. A post on Fashionista offers some information on how they run things (How Boohoo.com Releases up to 300 New Products a Day, Dec 16, 2015). As the title of the post suggests, Boohoo is rolling out lots and lots of new styles. They offered 4,000 new products in October, 2015. Focus on business days, and that gets you an average of 200 items a day (although some days top 300 items). Boohoo claims that it can go from identifying a trend to having items on its site in under two weeks, which lends itself to a lot of testing to see how customers react.

Boohoo also has the luxury of local production facilities in the U.K., where the company says it produces about 50 percent of its products. Plus, Kamani and Kane’s many years in the biz have allowed the company to develop relationships with even its most distant international factories, where it can place shallow orders on new items. This is the backbone of Boohoo’s “test-and-repeat” business model: It will stock only a few of a new style or trend, and then buy deeper if it performs well. “We can buy anything from 200-600 of a style and [do] a crowdsourcing approach where the customer ranks the stock for us,” explains Kane. “Within 48 hours of something going live, we have a good idea as to how many weeks we should run that style for and what kind of depth we should buy into it.” This business is also facilitated by the fact that Boohoo is online-only, and doesn’t have to worry about stocking multiple points of sale.

This ability to experiment system-wide seems to be where Boohoo’s speed really pays off. A short production run of a few hundred unit might allow Zara to experiment in a handful of stores. That may give them enough confidence to invest in a product across all of their markets but they are unlikely to have anywhere near the certainty that Boohoo would have. Once they do learn, Boohoo would also have an even easier time to get additional supplies to where they are needed. They just need to stock up their distribution centers while Zara has to fill out all its stores.

]]>https://operationsroom.wordpress.com/2017/04/11/the-benefits-of-supply-chain-speed/feed/1mlarivAllocating escalator capacity revisitedhttps://operationsroom.wordpress.com/2017/04/10/allocating-escalator-capacity-revisited/
https://operationsroom.wordpress.com/2017/04/10/allocating-escalator-capacity-revisited/#commentsMon, 10 Apr 2017 11:33:31 +0000http://operationsroom.wordpress.com/?p=5726Escalators are back in the news! A little over a year ago, Transport for London (i.e., the London Tube) got some press for an experiment they ran essentially prohibiting people from walking up the escalators at one of their stations. (We posted about that here.) Now the New York Times has seen fit to revisit the topic (Why You Shouldn’t Walk on Escalators, Apr 4). The Times’ definitive stance has not gone unchallenged. Indeed, Gizmodo has an essay taking the opposite side (Why You Should Always Walk on Escalators, Apr 4).

The source of controversy here is that Transport for London found that escalators moved more people per hour and delays to get on the escalators were shorter when people were kept from walking up the stairs. This is obviously a paradox. From an individual point of view, walking up the stairs has to be faster. If each individual can move faster, how can the overall wait be worse?

Walking up the escalator took 26 seconds
Standing on the escalator took 40 seconds
Fewer people can fit on the ‘walking side’ of the escalator – around 70% as many as those standing. This is because a ‘walker’ occupies more steps than a ‘stander’.

More specifically on the last point they estimate that a stander takes two steps while a walker needs three steps.

Now we can do a bit of math. With 3,600 seconds in an hour, an escalator dedicated to standers could move 3,600/40 = 90 customers per hour for every two steps. For walkers we get 138.46 customers per hour for every three steps. (Technically, this for one side of an escalator since if the standers stay on the right, we can devote half of our capacity to each group.)

Consider an escalator with 60 exposed steps (i.e., steps available for use). We would get that in a world of walkers we can lift 2,769 customers per hour. If we serve only standers, capacity drops down to 2,700 customers per hour. So walking has an advantage but it ain’t huge. The absolute advantage grows as the number of steps increases, but on a percentage basis it remains just 2.6%.

Of course, the size of the gain from walking depends on the assumption we make. If walking and standing require the same number of steps per customers, walking increases capacity by over 50%. If you believe that 2.5 steps per walker is a better estimate of the space required for easy walking, walking still delivers a 23% gain.

So what is the problem with letting people walk? This is really about the lumpy nature of capacity. We can’t really mix walkers and standers on the same side of the escalator. If we have just one escalator, do we really want to allocate half our capacity to walkers? Take the numbers above. 2,769 customers per hour translates to around 46.2 per minute. 2,700 per hour gives 45 per minute. Suppose we have 100 customers that need to go upstairs. If we give each group half the of capacity, we can move 96.2 customers per minute — assuming that arrive in the right proportion. Specifically, we need 50.6% ( = 46.2/(46.2 + 45)) to opt for walking. If we get 50.6% to walk, we can get all customers out of the station in 1.09 minutes. However, if less than 50.6% are willing to walk, standers will wait longer — potentially a lot longer. For example, suppose only 40% are willing to walk, it will take 1.33 minutes to serve the last stander while walkers are done in 0.867 minutes. In contrast, if we used both sides for standing, everyone is upstairs in 1.11 minutes. That is, splitting capacity evenly between the segments when the segments are not of equal size boosts the delay of standing customers by 20%. If the walkers make up a smaller portion of users, then the impact on standing customers is even more severe. For example, if walkers are only 30% of users, then the delay of standing customers is 40% higher than when everyone stands.

A couple of points before closing this post. First, this issue is going to be more relevant at deeper stations that have longer escalators (assuming that people are more likely to be dissuaded from walking when facing a long escalator). Second, this should be less of an issue in Chicago. Why? Because our train service is primarily elevated. What hammers a subway system is that you get batch arrival every time a train comes in. The exercise above of how fast can we get 100 people out of the station is in many ways the relevant problem. With an elevated train, you generally don’t have batch arrivals needing the up escalator (the Addison stop after a Cubs game may be an exception).

]]>https://operationsroom.wordpress.com/2017/04/10/allocating-escalator-capacity-revisited/feed/3mlarivA podcast on shipping containershttps://operationsroom.wordpress.com/2017/04/05/a-podcast-on-shipping-containers/
https://operationsroom.wordpress.com/2017/04/05/a-podcast-on-shipping-containers/#respondWed, 05 Apr 2017 10:26:01 +0000http://operationsroom.wordpress.com/?p=5724We have over the years had a number of posts on shipping containers but it’s not like the whole blog is about shipping containers.

But what about a whole podcast on shipping containers?

That now exists. You have to check out the podcast Containers! It is an eight part “audio documentary” on modern logistics. (There are currently five episodes posted.) I am selling it more than a little short in saying that it is just about shipping containers. It really looks at how innovations in moving freight by water have impacted supply chains, cities, and people. It is really fascinating.

]]>https://operationsroom.wordpress.com/2017/04/05/a-podcast-on-shipping-containers/feed/0mlarivA Starbucks that only take mobile ordershttps://operationsroom.wordpress.com/2017/04/04/a-starbucks-that-only-take-mobile-orders/
https://operationsroom.wordpress.com/2017/04/04/a-starbucks-that-only-take-mobile-orders/#commentsTue, 04 Apr 2017 10:02:32 +0000http://operationsroom.wordpress.com/?p=5715Last week I posted on the challenges Starbucks was having with an increasing number of mobile orders. Now, it seems that the company is going to test a different approach: A location that only takes mobile orders (Starbucks to test mobile order and pay-only store at headquarters, Mar 30, Reuters).

Starbucks’ headquarters has two cafes that serve the more than 5,000 company employees who work there. One of those cafes, which is available only to company employees, is among its top three stores in the United States for mobile ordering.

Mobile orders from the building will be routed to the new store, which will have a large window where customers can pick up drinks and see them being made.

So does this solve the problem? In a way, maybe. A mobile-only location would see a more uniform type of work in the sense that everyone would have the same expectation about waiting times etc. That eliminates questions of whether or not one should prioritize mobile or regular orders. However, there are a couple of caveats. For example, if the reason for a long delay is inadequate capacity, then this does not really solve the problem. That is, if the reason mobile orders take over 10 minutes during the morning rush is not enough baristas, then forcing everyone to order using their smartphone is unlikely to make a big dent in that wait.

A second consideration is whether this would work outside of the company’s headquarters. Starbucks might reasonably suppose that all of its employees use its app. In a standard location, not everyone may be so willing to commit to the app. That would almost certainly cost them some customers. In effect, it would reduce a store to being only for “regulars.” Starbucks might be OK with that if it keeps those regulars happy, but it might be problematic at locations where loyalists are a relatively small part of the customer base.

Further there is the consideration that only allowing mobile ordering moves a location close to being a glorified vending machine. I do not really want a deep conversation with the barista, but the thought of a Starbucks where there is no interaction with the staff is rather odd and impersonal for that has long aspired to be a third place.

]]>https://operationsroom.wordpress.com/2017/04/04/a-starbucks-that-only-take-mobile-orders/feed/4mlarivHow has mobile ordering impacted delays at Starbuckshttps://operationsroom.wordpress.com/2017/03/27/how-has-mobile-ordering-impacted-delays-at-starbucks/
https://operationsroom.wordpress.com/2017/03/27/how-has-mobile-ordering-impacted-delays-at-starbucks/#commentsMon, 27 Mar 2017 11:59:19 +0000http://operationsroom.wordpress.com/?p=5713In a perfect world, technology solves problems instead of creating them. Things don’t always go that way. Take, for example, Starbucks’ mobile ordering. This is, in theory, a convenience for users of their app. They can place an order before hitting the store, pay automatically, and get their drink and food without waiting in line.

Or at least that is the theory. The reality is that a surge in mobile orders has created a bunch of headaches for the coffee chain. Here are some details from when they announced their earnings at the end of January (Starbucks Tempers Revenue Forecast, Jan 26, Wall Street Journal).

Mobile order-and-pay represented 7% of U.S. company-operated transactions in the quarter, up from 3% in the prior year. The number of its highest-volume stores for mobile order-and-pay, where orders placed via the app account for more than 20% of transactions during peak hours, doubled to 1,200 stores over the prior quarter.

The high rate of mobile ordering was blamed by Starbucks for increased waits and with that lost customers. In the last quarter, dollar sales were up because the average purchase size outweighed a 2% decline in transaction.

I must say upfront that I admire the approach of getting an article out of doing something that one would likely have done anyway. I only wonder whether the reporter was able to get Business Insider to pick up the tab for her drinks.

So what does one find by going to Starbucks every day? That waits can be long.

While Starbucks promises that mobile orders will be ready within three to five minutes of placing an order, the chain fulfilled this promise in just one out of five visits. Three of my orders took roughly 10 minutes — more than twice as long as promised.

The process was far from seamless. Customers crowded around in the back of the store waiting for their drinks. And baristas at times called out mobile orders for customers who were not yet there to pick up their beverages.

There was no discernible relationship between the numbers of people waiting in line and of people in the crowd waiting for their beverages. One of my longest waits, which took 10 minutes, 35 seconds, occurred when there was no line at the front of the store; another day, I received my drink in 4 minutes, 15 seconds despite a crowd of customers waiting to order.

The worst part: Ordering via mobile didn’t necessarily save time. Walking in, waiting in line, and ordering at the counter also took me about 10 minutes.

The article also reports that baristas have taken to Reddit to complain about the hassles (and pissed off customers) created by mobile ordering.

A fundamental problem here is that mobile ordering has been tacked onto existing stores without fundamental changes in how the stores are organized. At first glance, that may not seem like a big deal. Mobile customers are ordering the same lattes and cookies as those standing in line. However, they do bring different steps to the process. For example, where do they pick up their orders? Do they join a scrum with those who sucked it up and waited in line or is there a separate spot? Check out the Business Insider article for some pictures of the less-than-elegant solutions found at different locations.

So what about the waits? According to the Journal, Operating Chief Kevin Johnson claims “the company plans to fix the problem with better signage, text messages telling customers when their orders are ready, and the deploying of employees to hand off mobile orders.” Better signs might help customers figure out where to grab their drink but it may not be a panacea. I would guess that the biggest problem here is that customers are annoyed with the delay at the Starbucks that’s near their office. That is, their regular Starbucks where they have already figured out where to grab their drink. Similarly, it’s not clear how a text helps reduce the wait — although it might reduce the aggravation of line waiters who hear baristas calling out names for mobile orders that were processed before theirs.

A simple solution here might be to give priority to mobile orders. You have promised a short time to one group and haven’t really made a commitment to another. Taking care of the former seems a like an obvious solution although it also will obviously negatively impact regular customers. Priorities, of course, don’t have to be absolute and set in stone. There are a number ways adjusting them dynamically so that the line-waiters don’t get too badly abused. For example, one could give priority to mobile orders as long as no regular order has been waiting for more than, say, two minutes. Similarly, one should not treat all mobile orders the same. If Starbucks can see how far way the customer is when they order, one could do those nearest to the store first.

A solution that makes all of these problems go away is adding more capacity. If any orders are routinely waiting over ten minutes, then Starbucks may just have an understaffed store. Improved signage and text message won’t fix that. Only more baristas will.

]]>https://operationsroom.wordpress.com/2017/03/27/how-has-mobile-ordering-impacted-delays-at-starbucks/feed/4mlarivPrinting fabric for coucheshttps://operationsroom.wordpress.com/2017/02/20/printing-fabric-for-couches/
https://operationsroom.wordpress.com/2017/02/20/printing-fabric-for-couches/#commentsMon, 20 Feb 2017 11:37:56 +0000http://operationsroom.wordpress.com/?p=5710Have you ever ordered a couch or arm-chair and waited an interminable amount of time for delivery? The usual reason why getting upholstered furniture often takes forever is the fabric. From the manufacturer’s point of view, the fabric is expensive, which would be tolerable if one could count on it moving through the process quickly. However, in the furniture world, you can’t count on that. Above a certain price point, nearly every manufacturer competes on offering lots of variety. Once you pick out a couch that’s the right size and sufficiently comfy, you get handed a book of fabric samples with literally hundreds of choices. Some — indeed, most — of those options are destined to be low runners, rarely chosen options that will appeal to only a very few customers. That creates problems for the manufacturer. Holding all of those options in inventory may just be too costly. A manufacturer may hold some of the more popular variants in inventory, but for the more esoteric choices, they will wait to order the fabric after getting an order for a couch.

But what if you could print the desired pattern for the couch on site?

Inside the company’s original 80,000-square-foot factory in south suburban Thornton sits a costly new piece of machinery that no other U.S. furniture maker has. Wecker sees it as the key to the future: a digital textile printer capable of producing fabric in any one of 500 colors or patterns.

Digital textile printers allowed clothing shops like Zara and H&M to accelerate a garment’s time from runway to store. Wecker, 38, is applying the fast-fashion concept to furniture. Together with DwellStudio designer Christiane Lemieux, she’s launched a new venture, Cloth & Company, with exclusive collections for retailers Wayfair, Overstock, One Kings Lane and Modsy. The goal is to offer Skyline’s customers like Target.com the ability to sell customized furniture at midrange prices that ships in six days.

At one level, this is a pretty standard postponement story — delaying the differentiation of a product allows manufacturers to provide more variety without having inventory explode. It is essentially the approach Dell took that gave them a nice run in the PC market. Here Skyline is going for a dimension of variety that (a) customers greatly value and (b) is expensive to provide in a conventional manner. Printing the pattern on the fabric solves allows them to deliver quickly while holding only common base materials.

Such postponement strategies usually have higher costs. That is, printing yards of a particular pattern is likely more expensive than grabbing a couple of yards from a conventional long production run. However, the inventory savings from not holding lots of patterns as well as a price premium from delivering rapidly could conceivably cover the additional production cost.

Another point here is about what it takes to compete as an American manufacturer. Producing in the US will necessitate higher cost and that means having some reason why customers should cover that added expense. Variety AND quick delivery would be very good reasons for customers to open their pocketbooks.

]]>https://operationsroom.wordpress.com/2017/02/20/printing-fabric-for-couches/feed/1mlarivJust in time for the Super Bowl: Why NFL footballs start in Chicagohttps://operationsroom.wordpress.com/2017/02/04/just-in-time-for-the-super-bowl-why-nfl-footballs-start-in-chicago/
https://operationsroom.wordpress.com/2017/02/04/just-in-time-for-the-super-bowl-why-nfl-footballs-start-in-chicago/#respondSat, 04 Feb 2017 11:40:13 +0000http://operationsroom.wordpress.com/?p=5700This is, of course, the weekend of the Super Bowl. While other business sections might focus on advertisements, the Chicago Tribune takes a hometown angle and talks pigskin — or more accurately cowhides since that’s what footballs are, in fact, made of (Chicago’s in the Super Bowl: Local firms team up to make big game’s football, Feb 2). The footballs are made by Wilson, which is based in Chicago, but the balls are made at a factory in Ohio. The leather, however, all comes from Horween Leather which has processed hides in Chicago for over 100 years.

Here’s a description of just what they do for the leather:

For 24 hours, hides are treated with an acid solution that removes the hair. To make leather used in sporting goods, hides get a first round of tanning in large drums where fats and oils are stripped away and chrome is added to strengthen the material.

Employees then take the “wet blue” hides — named for their pre-dyed tint — and assess quality. Every hide will get another round of tanning, but the process depends on the final product. Football leather emerges with a grippable tackiness — part of the reason Nick Horween is irked when announcers blame flubbed passes on slippery balls.

Bone-colored football leather is dried in an oven on the tannery’s top floor, glued to glass plates to keep it from shrinking. A pebblelike texture — Wilson’s pattern includes tiny W’s — is stamped on with heated steel plates. The leather then is sprayed with dye until it’s that recognizable reddish-brown hue.

The whole article is worth checking out and features a video of the Horween plant.

]]>https://operationsroom.wordpress.com/2017/02/04/just-in-time-for-the-super-bowl-why-nfl-footballs-start-in-chicago/feed/0mlarivProduction planning for the holidays at Legohttps://operationsroom.wordpress.com/2016/12/22/production-planning-for-the-holidays-at-lego/
https://operationsroom.wordpress.com/2016/12/22/production-planning-for-the-holidays-at-lego/#commentsThu, 22 Dec 2016 23:35:32 +0000http://operationsroom.wordpress.com/?p=5697This should not surprise you at all: Christmas is a big deal for Lego. According to the FinancialTimes, half of the company’s sales come in the month or so before the holiday (Lego makes push to avoid disappointments of Christmas past, Dec 22). But how do they gear up for that big peak in sales? Check out the video below:

The interesting part of this to me is how they balance inventory and capacity. From the article:

Chresten Bruun, head of the factory, explains how the 768 moulding machines that produce about 125m pieces of Lego each day are divided into two types. One, called “green flow”, is for high-volume, standard bricks. The other, “red flow”, is for more specialised, unusual bricks. …

For much of the year, and particularly in the far slower first half, most of the machines churn out millions of standard bricks under the green flow. These are then stockpiled until later in the year.

This is just a nice example. Lego has many parts that are very, very generic. A six nub brick in gray can go into countless sets as well as being sold on its own. They will never not make such a brick. The cost of holding such a piece from, say, February until it is packaged in October or November is trivial. There is no reason not to utilize capacity in slow months to produce these basic pieces since that would allow capacity to do more specialized pieces later in the year. In effect they are using inventory to shift the availability of capacity in time.